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NARUC Staff Subcommittee on Accounting and Finance
Performance-Based Regulation (PBR): Focus on Outcomes
Camille Kadoch
March 6, 2018
Jim Lazar
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Regulatory Assistance Project (RAP)®
1. Why is PBR important
2. What is PBR
3. PBR schemes we’ve learned a lot from
4. Successful examples of PBR
5. New and Interesting – NY REV
6. Conclusions
2
Outline for Today’s Discussion
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1 Why is PBR important?
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Regulatory Assistance Project (RAP)®
• Allow regulators and other stakeholders to focus
on goals
• Improve utility performance in unsatisfactory areas
• Encourage utilities to maintain, or even improve
specific areas (ex customer service/satisfaction)
• Provide greater regulatory guidance to address
new and emerging issues, ex: grid modernization
4
Why PBR?
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Regulatory Assistance Project (RAP)®
• Incentives inherent in cost-of-service regulation
are to build big, centralized power plants
• Inherent barriers to new technologies and
advancements on customer side of the meter
• PBR can align the interests of utilities, regulators,
and customers better if done well.
Old system = barrier to new technologies, policies
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Regulatory Assistance Project (RAP)®
• Service quality & reliability
• Cost-control
• Solar distributed generation
• Peak load reduction
• Increase customers enrolled in time-varying rates
• Water savings
6
PBR can identify and target positive incentives and outcomes
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Regulatory Assistance Project (RAP)® 7
• Witnessing transformative
technology changes
• Need regulatory structures
that work for a wide variety
of future scenarios
• PBR specifies expectations
and outcomes, but is
agnostic as to delivery
PBR can harness disruption
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Regulatory Assistance Project (RAP)® 8
PBR is versatile
municipalities
State-owned entities
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2 What is PBR?
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Bradford, P. (1989). Incentive Regulation from a State Commission Perspective. Remarks to the
Chief Executive’s Forum
10
“All regulation is incentive regulation”
Incentives of traditional regulation• Build rate base in a rate case• Exaggerate costs for a future test year• Increase volume of sales between rate cases, i.e.,
the “throughput” incentive• Cost reduction between rate cases
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1989 NARUC
Resolution:
“A utility’s least
cost plan should
be it’s most
profitable plan.”
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Regulatory Assistance Project (RAP)®
PBR is…
• A regulatory framework to connect achievement of
specified policy objectives to utility financial
performance and executive compensation
• A PBR scheme is a collection of performance
incentive mechanisms (PIMs), namely, metrics
and formulas that determine the levels of financial
rewards or penalties (i.e., adjustments to allowed
revenues) for achievement of the specified
objectives
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Regulatory Assistance Project (RAP)®
• Decoupling eliminates the "throughput" incentive
• Utility is indifferent to variations in sales, either
up or down, due to weather, EE, DG, etc.
• Decoupling is NOT an incentive mechanism
• PBR rewards (or penalizes) a utility for
achievement of (failure to achieve) specified
outcomes
• They fit together well
13
Revenue-Based Regulation (Decoupling) and PBR
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Regulatory Assistance Project (RAP)®
• PBR was an evolutionary step, to provide price
flexibility for certain services to provide incentives
for innovation and cost-cutting
• Applied in telecommunications and rail sectors
• Early applications of PBR were explicitly meant to
drive cost savings
• Extensive use of energy efficiency incentive
mechanisms (26 states)
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History of PBR
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Regulatory Assistance Project (RAP)®
Photo: Heidi Sandstrom
Photo: Heidi Sandstrom
Goals and Incentives
• Informed by public policy priorities in the
jurisdiction
• Directional incentives-- Specify measureable
performance criteria, goals, and metrics
• Operational incentives-provide metrics to
measure operational considerations.
• Guiding goal = reduce growth in system peak
• Directional incentive = deploy DERs
• Operational incentive = no decrease in reliability
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Regulatory Assistance Project (RAP)®
• Identify, articulate, prioritize goals
• Does conventional regulation meet those goals?
• Does the system reach achievable levels of
cost-effective EE?
• Do you want more RE or particular types of RE
on the system?
• Assess existing incentives for goals
16
Status quo: will it work?
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Regulatory Assistance Project (RAP)®
Photo: Christian Kaindl
Performance Criteria, Metrics• Quantifiable measure of a specified performance
• Typically expressed as standard power system
measures or consumer impact measures
• Examples:
• Service quality, e.g., improved customer service
• EE savings, as a % of utility sales or as reduced
consumer bills as a result of EE
• Fuel and purchased power cost control
• Reduced outages, SAIDI / SAIFI / CAIDI / CAIFI
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Regulatory Assistance Project (RAP)®
1. Clear Goals
2. Measurable Metrics
3. Transparency
4. Value to the Public
5. Align Benefits and Rewards
6. Annual Review: Learn from Experience
7. Compared to What?
8. Simple Designs are Good
9. Evaluation and Verification
10. Public Review
11. Award of rewards or penalties
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Successful PBR components
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Regulatory Assistance Project (RAP)®
• Outputs are
specific results of
utility actions
• Outcomes are
how utility services
affect ratepayers
and society
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Outputs, Outcomes
Output OutcomeCertain SAIFI result Reliable service
Calls to call center
answered in less than
20 seconds
Responsive
customer service
Disconnections at
less than x per month
Universal service
Interconnection of DG
averaging $X in user
costs on average in
under Y days
Supported
customer
generation
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3 PBR schemes that we learned a LOT from
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Regulatory Assistance Project (RAP)®
• Disproportionate rewards or penalties
• Unintended consequences
• Regulatory burden
• Poorly designed metrics
• Gaming and manipulation
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What could possibly go wrong?
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Regulatory Assistance Project (RAP)®
• Basing performance incentives on inputs ($$
spent)
• Rewards or penalties based on exogenous factors
ex: weather, economic growth, etc.
• Unclear or uncertain metrics or goals
• Lack of clarity and measurement methodology
• Not understanding utility motivations
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Practices that can lead to difficulty
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Regulatory Assistance Project (RAP)®
• 2% increased return on equity for energy
efficiency investments
• incentive to spend as much as possible on
measures that save as little as necessary
• maximizing the incentive while minimizing the lost
revenue to the utility .
•This is an example of focusing on inputs (amount
spent), poor operational incentives and metrics. 23
Energy Efficiency FundingU.S. State of Washington, 1980
Photo by Jay Mantri on Unsplash
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Regulatory Assistance Project (RAP)®
Pacific Northwest Bell, 1986
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Result:
• Cut customer service
• 1-900 number for customer service
• Incentive to keep customers on hold
Carte Blanche for Cost Cutting
Photo by Quino Al on Unsplash
5-year rate freeze, no restrictions on the cost-cutting methods
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Regulatory Assistance Project (RAP)®
Puget Sound Power and Light, Washington
25
• Utility short of the targets in 9 out of 10 topical
areas, but received huge incentive
Energy Efficiency Incentive Structure, 1990
• Incentive structure: • Part 1: based on how much energy
efficiency was achieved, • Part 2: how cheaply it was achieved.
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Regulatory Assistance Project (RAP)® 26
California customer satisfaction survey
• Unspecific customer survey: Please ranking your customer satisfaction on a 1-5 scale
• Under pressure utility representatives offered small gifts to ratepayers to obtain positive answers and ultimately produced falsified results
• Fix: Objective Criteria and Third-Party Evaluation
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Regulatory Assistance Project (RAP)® 27
Importance of transparency, alignment of benefits/rewards
• North Carolina “Save-A-Watt”
• Didn’t give utility incentive to capture all cost-
effective efficiency, kept utility focused on low-
hanging fruit
• The incentive was avoided investment in plant
• Perceived as paying excessive incentives to the
utility for low-hanging fruit savings
• Got a lot of bad press, but learned a lot from it
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Regulatory Assistance Project (RAP)® 28
• To broadly improve transmission reliability and
reduce congestion, FERC’s Order No. 679
awards the transmission utility a higher rate of
return on equity for new transmission investment.
• There is no requirement to quantify the benefits
of a given investment in relationship to overall
costs
• Focuses on input ($$ spent)
FERC Transmission ROE Policies
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4 Examples of Successful PBR
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Regulatory Assistance Project (RAP)®
ComEd customers enrolled in time-varying
rates – reporting metric only
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• Number of residential customers on the utility
tariff with time-variant or dynamic pricing
• Number of residential customers serviced by
retail suppliers which have requested monthly
data interchange for interval data
• New metric, report only to build experience,
transparency
Illinois Metrics for Time-of-Use Rates
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Regulatory Assistance Project (RAP)®
Diablo Canyon nuclear plant costs were
high
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• Rate base of cost overruns rejected
• Performance metric based on plant availability
• Diablo Canyon enjoyed a very high availability rate
and operated with a very high capacity factor for
much of its service life.
California PBR for nuclear plant capacity factor
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ConEd’s Brooklyn-QueensDemand Management Project
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Regulatory Assistance Project (RAP)®
• Change course from traditional response to reliability challenge
• Build $1.2B substation
• or
• Reduce sustained load for years
• Innovation needed
• Utility side response: find 52 MW locally
• Regulatory response: 10 year amortization of expenses• Remove bias between opex and capex
• Incentive– shared savings:
• Utility– cost recovery of DER assets, ROE adder
• Customers -- avoided costly distribution charges
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Brooklyn-Queens Demand Mgt. ProjectCase 14-E-0302
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5 New and interesting
New York’s Reforming the Energy Vision – taking PBR to a
meta level
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Regulatory Assistance Project (RAP)®
Challenges• Aging infrastructure
• Poor system efficiency
Business-as-usual is no longer an acceptable option for New Yorkers
Historical regulatory approach and utility business
models are not well adapted to address challenges and
capture opportunities
• Flat Sales Growth
• Climate Change
Opportunities• Rapidly falling technology
costs
• New Business Models
• Rise of Digital Economy and new IT capabilities
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Regulatory Assistance Project (RAP)®
• A grid with an emphasis on customer resources
• With dispatched resources
• Aligned with public priorities
• Systematically innovative
• What does it take to get one of those?
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The REV Vision
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Regulatory Assistance Project (RAP)®
• Reliability
• Outage frequency, duration
• Operations
• System efficiency, power flows
• Resilience
• Enable consumers to specify superior service
• Services
• Create new products, enable new business
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Improved…
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Regulatory Assistance Project (RAP)®
• Enhanced customer knowledge and tools to
support bill management
• Market animation and leverage of customer
contributions
• System wide efficiency
• Fuel and resource diversity
• System reliability and resiliency
• Reduction of carbon emissions
Six Policy Objectives for the future of NY’s electricity system
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Regulatory Assistance Project (RAP)®
• PBR is a powerful tool in the regulatory toolbox
• PBR can align utility, ratepayer, and public
interests
• PBR succeeds where it is clear, transparent at
each step, and aligns rewards and incentives for
utilities and customers
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Conclusions
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About RAPThe Regulatory Assistance Project (RAP)® is an
independent, non-partisan, non-governmental
organization dedicated to accelerating the transition
to a clean, reliable, and efficient energy future.
Learn more about our work at raponline.org
Camille Kadoch, General Counsel
U.S. Team
The Regulatory Assistance Project®
Jim Lazar, Senior Associate
U.S. Team
The Regulatory Assistance Project®